29 OCTOBER 2004
NEW ZEALAND GAZETTE, No. 139

56

The Commission should seek to minimise the impacts of the reserve energy scheme on the
‘ordinary’ market. The Commission should adopt a tight ring-fence whereby reserve energy may
be used only for security of supply objectives, with the exception of distributed generation used
for distribution network load management9. This will minimise the extent to which incentives to
invest in ordinary generation and demand-side management are affected.

57

Contracts with reserve energy providers should provide for fixed payments for availability and
variable payments when the reserve energy is called upon. Any spot price revenue received
during operations should go to the Commission and be used for reducing reserve energy and
other levies.

58

The Government has built a 155MW power station at Whirinaki for reserve energy use. Pursuant
to the Electricity Act 1992, this power station will be available to the Electricity Commission by
contract for the purpose of reserve energy.

59

For the avoidance of doubt, the Government does not want the Electricity Commission to own
reserve generation plant.

Trigger mechanism

60

Reserve energy should be offered for dispatch to the system operator at 20c/kWh or the variable
payments which have been contracted for, whichever is the higher.

61

However, if the minimum hydro zone is breached reserve energy may be offered for dispatch at a
lower price to preserve hydro storage. If the minimum zone is breached and all available thermal
generation is not being used to minimise hydro usage, the Commission should investigate the
reasons and consider what action, if any, would be desirable.

Levy

62

The Commission is expected to recover some of the costs of contracting for reserve energy from
spot market revenues when reserve generation operates. However, net costs should be
recovered initially by way of a levy which is administratively simple and applies to all consumers
based on wholesale purchases on an equal basis. (The levy should be reviewed as part of the
overall review noted below).

63

Over time, the levy will aim to recover the net costs the Commission incurs for reserve energy
(that is, operating and capital payments less any revenue received from the sale of reserve
energy).

Regulations

64

As noted, the Government considers it particularly important that the way the reserve energy
mechanism operates should minimise any adverse impacts on incentives for investment in
ordinary generation, demand side management, and management of price risks. Accordingly, it
proposes to help provide regulatory certainty by specifying the key operational parameters of the
reserve energy mechanism in regulations so that changes to those parameters can be made only
by regulation. Furthermore, changes will be able to be made only on the recommendation of the
Commission.

Review

65

The Electricity Commission should contract an independent third party to review the efficiency
and effectiveness of the reserve energy policy in meeting security of supply objectives while
minimising distortions to investment incentives in the ordinary market. Efficiency should include
both static and dynamic efficiency. The review should take into account developments in other
areas of security of supply policy such as security of supply co-ordination policy (see below).

9

To ensure this exemption does not undermine the objective of a tight ring-fence, the Commission
should define operating parameters carefully, including considering a cap on the MW capacity of
the plant and on the number of hours a year the plant may operate for network management
purposes.